Interpreting the Correlation Between Inflation and the Skewness of Relative Prices: A Comment on Bryan and Cecchetti

Ball, Laurence; Mankiw, N. Gregory

doi:10.1162/003465399558157

Cited by 9 publications

(8 citation statements)

References 3 publications

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“…Some studies find that the effect of skewness is stronger (e.g. Mankiw, 1995, Debelle andLamont, 1997, Bryan and Cecchetti (1999), who argue that the relationships estimated in the literature reflect measurement error (but see, the rejoinder by Ball and Mankiw, 1999). It has also been suggested that a relationship based on menu-cost arguments will not be applicable in a context of a higher inflation rate where menu costs are less relevant.…”

Section: ) Methodologymentioning

confidence: 99%

Relative price variability and the Phillips Curve: evidence from Turkey

Çatık

Martin

Önder

2011

Journal of Economic Studies

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We argue that relative price changes are a key component of the Phillips curve relationship between inflation and output. Building on work by Ball and Mankiw, we propose including measures of the variances and skewness of relative price adjustment in an otherwise standard model of the Phillips curve. We examine the case of Turkey, where distribution of price changes is especially skewed and where the existence of a Phillips curve has been questioned. We have two main findings: (i) inclusion of measures of the distribution of relative price changes improves our understanding of the Phillips curve trade-off; (ii) there is no evidence of such a trade-off if these measures are not included.

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Section: ) Methodologymentioning

confidence: 99%

Relative price variability and the Phillips Curve: evidence from Turkey

Çatık

Martin

Önder

2011

Journal of Economic Studies

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“…However, Ball and Mankiw (1999) argued that the small sample bias of the type observed by Bryan and Cecchetti (1999) could arise only in a model wherein a subset of distribution of observed relative price changes is drawn from an underlying true distribution of relative price changes. They argued that the measure of aggregate inflation is based on price changes across all the sectors of an economy and hence, by construction, a small sample-bias cannot arise.…”

Section: Theoretical Frameworkmentioning

confidence: 99%

Price Rigidity, Inflation and the Distribution of Relative Price Changes

Rather

Durai

Ramachandran

2015

South Asian Journal of Macroeconomics and Public Finance

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This study examines whether skewness of the cross-sectional distribution of relative price changes is positively associated with aggregate inflation as predicted by the menu cost model of Ball and Mankiw (1994, 1995). Further, the study examines the size and frequency of price changes across various commodities and the distribution of relative price changes. The results from highly disaggregated Indian wholesale price index (WPI) data suggest that the skewness of relative price changes explains a significant proportion of short-run fluctuations in aggregate inflation. More importantly, the results indicate that the average size of price increases is greater than the size of price decreases implying downwards rigidity in the prices of various commodities. JEL Classification: E30, E31, E52

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“…In fact, Bryan and Cecchetti (1999) argued that such an underlying data‐generating process can explain why skewness is correlated with the mean: a small sample containing draws from the upper (lower) tail will raise (lower) both mean and skewness, with no underlying economic mechanism required. Ball and Mankiw (1999) respond with an appeal to the standard theory of price determination: the aggregate inflation rate is determined by monetary factors while real factors (such as demand and costs in the various industries) determine N – 1 relative prices, where N is the number of industries. According to Ball and Mankiw, Bryan and Cecchetti “merely offer a statistical version of the layman's misconception”—that the sectoral shocks determine all N nominal prices and that the aggregate price level is simply determined by the average of these prices 16 .…”

Section: A Dynamic Menu‐cost Modelmentioning

confidence: 99%

“…16 16 Ball and Mankiw (1999) cite a Newsweek article by Friedman (1975) on the effects of oil‐price rises in the early 1970s. Friedman asks, “Why should the average level of all prices be affected significantly by changes in the prices of some things relative to others?” …”

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confidence: 99%

Relative Prices as Aggregate Supply Shocks with Trend Inflation

Demery¹,

Duck²

2008

J of Money Credit Banking

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Ball and Mankiw (1995) use a static menu-cost model to explain the historical behavior of the first and higher moments of commodity price changes in U.S. producer prices. We show that when appropriately modified for a world of positive trend inflation and forward-looking behavior by firms, the menu-cost model predicts a much weaker (possibly zero) correlation between the mean and the skewness of price changes than that found in the data. Copyright (c)2008 The Ohio State University.

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Interpreting the Correlation Between Inflation and the Skewness of Relative Prices: A Comment on Bryan and Cecchetti

Cited by 9 publications

References 3 publications

Relative price variability and the Phillips Curve: evidence from Turkey

Relative price variability and the Phillips Curve: evidence from Turkey

Price Rigidity, Inflation and the Distribution of Relative Price Changes

Relative Prices as Aggregate Supply Shocks with Trend Inflation

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